In the midst of heightened military tensions and escalating conflicts, Israel finds itself grappling with the specter of an economic downturn reminiscent of the tumultuous 1970s. The nation’s economic landscape is under strain as defense expenditures soar to unprecedented levels, raising concerns among economists and policymakers alike.
The roots of this economic unease trace back to the aftermath of the 1973 Yom Kippur War when Israel significantly bolstered defense spending to address newfound security risks. The resulting economic fallout, often referred to as a ‘Lost Decade,’ cast a long shadow over Israel’s economy. Now, as the nation faces another wave of heightened military expenditure, fears of history repeating itself loom large.
The ongoing conflict in Gaza stands as the most expensive military engagement in Israel’s history, with the central bank estimating costs to surpass 250 billion shekels ($67.4 billion) by 2025. Prior to the conflict, defense spending had been at a historic low of 4.5% of GDP. However, with the demands of the current conflict, this figure is set to double to 9% this year alone.
The economic repercussions of this surge in defense spending are already being felt across various sectors of Israeli society. The country’s thriving tech industry, long a beacon of innovation and growth, now finds itself grappling with labor shortages as hundreds of thousands of reservists are called into duty. Additionally, businesses, particularly those in and around the Tel Aviv area, are feeling the pinch as consumer spending dwindles amidst wartime mobilization.
Adding to these economic difficulties are worries regarding the viability of Israel’s fiscal strategies. Prime Minister Benjamin Netanyahu’s dedication to significant spending, primarily influenced by his ultra-Orthodox coalition allies, has sparked concerns among economists. They fear a possible “spiral of collapse,” which could entail a significant departure of well-educated, high-income individuals seeking to evade the responsibility of supporting large Orthodox households.
In response to these mounting concerns, calls have emerged for a reevaluation of Israel’s spending priorities. Economists have urged the government to end public support for schools that fail to prepare students for the modern labor market and to reconsider exemptions for ultra-Orthodox individuals from military service.
Furthermore, there are growing worries that increased defense spending could come at the expense of critical social investments. Israel already lags behind developed economies in areas such as education and health, and diverting funds towards military upgrades could exacerbate these disparities, potentially stunting long-term economic growth.
Meanwhile, on the other side of the globe, China faces its own economic challenges. A property market slump has led to a decline in household wealth, prompting Chinese households to ramp up savings in safe assets like deposits and cash. However, with interest rates on the decline, the future returns on these assets remain uncertain, adding another layer of complexity to the global economic landscape.
As Israel navigates the complexities of wartime spending and economic strain, the stakes could not be higher. The decisions made in the coming months will not only shape the nation’s economic trajectory but also have far-reaching implications for its society and security. Only time will tell whether Israel can avoid the pitfalls of its past and chart a course towards a more sustainable and prosperous future.
